Microsoft's bet on touch PCs fails to pay off

Microsoft's bet that touch would propel Windows 8 has run into a major snag, an industry analyst said Friday: Consumers see little reason to pay premium prices for touch-enabled laptops.

According to IDC, touch-ready laptop shipments are significantly lower than optimistic forecasts by computer makers such as Acer, whose president, Jim Wong, said in May that by the end of the year 30 per cent to 35 per cent of his company's notebooks would sport touchscreens.

"We forecast that 17 per cent to 18 per cent of all notebooks would have touch this year," Bob O'Donnell, an analyst with IDC, said in an interview Friday, referring to the research firm's own estimates earlier this year. "But that now looks to be too high, to be honest." He said IDC would probably drop its touch estimates to between 10 per cent and 15 per cent of all laptops.

Others have already pegged touch to that range for the year. In April, NPD DisplaySearch said that about 12 per cent of notebooks sold in 2013 would be equipped with touch.

Those numbers bode ill for Microsoft, which has tied Windows 8 to touch on all platforms, not just tablets. It bet that buyers would find Windows 8 attractive because it was designed as a touch OS, repeatedly describing the radical overhaul as "touch-first." The Redmond, Washington, developer assumed that once customers tried Windows 8 on touch-equipped traditional form factors, like clamshell-style notebooks, they would love the operating system.

"Frankly, the supply was too short," said Tami Reller, at the time the CFO of the Windows division, in January. "I mean, there was more demand than there was supply in the types of devices that our customers had the most demand for."

Microsoft's message was clear: If touch PCs had been more prevalent, Windows 8 would have gotten out of the gate faster. And once touch was more widely available, the new operating system would power a rebound in PC sales.

But half a year after Reller's finger-pointing and nine months after Windows 8's debut, most customers are taking a pass on touch, said O'Donnell.

One reason is that touchscreen laptops remain more expensive than non-touch models. Many industry watchers expected that prices would quickly fall as demand climbed and computer makers scaled up to crank out more touch-enabled PCs.

"Touch was too expensive last year," said O'Donnell. And although he acknowledged that prices have fallen, they have not dropped far enough. "They're generally in the $US699 to $US799 range," he said. That's hundreds more, sometimes as much as double the price, of non-touch notebooks.

Touch's premium continues to scare off buyers who have been trained by years of cut-rate PC deals, but the prices themselves are not entirely to blame. Even if the gap between touch and non-touch PCs was significantly smaller, customers would still pass because they don't see much value in having touch on a PC.

"Touch is just not that compelling for most. There are not that many touch-required apps that people feel they must have," said O'Donnell.

That argument has been hammered home by analysts since before Windows 8's launch: Microsoft's ecosystem has not produced enough high-quality, have-to-have apps to spur sales of tablets or convince traditional PC buyers to abandon the mouse-and-keyboard Windows interface and its legacy applications.

Minus compelling touch apps, people don't see the point of spending more for a feature they don't plan to use, O'Donnell said.

And Microsoft may have a touch problem for a long time if analyst Patrick Moorhead was right last week. Unless Windows 8's catalog is quickly fleshed out to include most of the top-100 apps -- one study said the OS had just 54% of that list covered -- it will be plagued with an app-gap reputation for years, Moorhead said.

"The big challenge Microsoft faces is doing whatever it can to make Windows 8 work in a non-touch environment," O'Donnell said. "Ninety percent of the PCs sold this year are not going to have touch."

Microsoft has made some moves in that direction with Windows 8.1, slated to ship this fall. Windows 8.1 will offer users the option of booting directly to the traditional desktop, avoiding the touch-first Start screen, and will restore a Start button-like control to the desktop. Both were replies to long-running criticism that the company was forcing a touch-centric user interface (UI) down customers' throats.

"They did make some changes, like the Start button, but they should have gone farther," said O'Donnell. "They should have restored the Start menu, too."

In Windows 8.1's preview, which shipped in late June, the Start button takes users to the touch- and tile-based Start screen for launching applications; a return of the Start menu, where programs would be listed for launching, would let people avoid the Start screen almost entirely.

The touch disconnect between Windows 8 and the PC industry may be part of the reason why long-time Microsoft partners are increasingly nervous about the future.

Last week, Acer -- the Taiwanese computer maker that in May predicted touch notebooks would make up a third of its inventory -- voiced the strongest anti-Windows 8 statement yet by an OEM.

"We are trying to grow our non-Windows business as soon as possible," Jim Wong, Acer's president, told investors, according to the Wall Street Journal (subscription required).

J.T. Wang, the firm's CEO, weighed in as well. "The Windows camp has to do something to reestablish or reinforce confidence among PC users," said Wang. "People are reluctant [to buy] and are holding [off] their purchasing decisions."

As a remedy, Acer -- the world's fourth largest PC seller -- will boost the number of devices it makes that rely on Google's Android and Chrome OS operating systems. Android is the backbone of most smartphones and tablets, while Chrome OS, a slimmed-down, browser-based operating system, powers inexpensive Chromebooks, which are notebooks by another name.

Acer's issue with Windows isn't its only problem -- IDC estimated that Acer's PC shipments dropped 32% in the second quarter compared to the year before, nearly three times the industry average -- but by quickly turning its back on Microsoft, Acer spoke volumes.

And it isn't alone.

Also last week, Asus, the fifth-largest PC OEM, announced it is dropping Windows RT from its OS stable. The computer maker, which saw its PC shipments plunge by 21% year-over-year in the second quarter, had been the only active supporter of Windows RT other than Microsoft itself.

The entire PC industry, touch and non-touch, has been on a five-quarter downturn, a record for the industry, and analysts expect the run to continue. O'Donnell said that IDC would soon lower its third-quarter estimates because of gloomier notebook production forecasts from its Asian analysts.

Currently, IDC expects that total PC shipments in 2013 will be down about 8%. But that estimate was predicated on a stronger second half of the year, which now appears unlikely.

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